The phrase Mergers and Acquisitions or M&A refers to the aspect of corporate finance strategy and management dealing with merging and acquiring of different companies as well as other assets. Usually mergers occur in a friendly setting where executives from the respective companies participate in a due diligence process to ensure a successful combination of all parts. On other occasions, acquisitions happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market.

Before you jump to any conclusions and turn the page, this is not a lesson in corporate finance. This is however an article about how technology is being used by professionals across the world to achieve their goals and to carry on their business.

Information . . . as we all know is the key to the success for every aspect of business, so also in the case of M & A activity, the access to information and its correct analysis, and interpretation is imperative. Before the acquirer makes a bid for acquisition of the target company, a due diligence exercise is carried out. In other words, the target is required to make available various types of information in the form of reports, minutes of board meetings, audit committee discussions, i.e., the ‘inner secrets’ of every aspect of the business. This is of course for a limited time period and to authorised executives only. Today the exercise is particularly complex in the sense that there would be someone from the corporate finance team, there would be lawyers, then investment bankers, CAs, etc., carrying out a scrutiny and investigation of various aspects of the business. For all transactions, the objective of due diligence is to assist a buyer in determining whether to acquire a target, if so, for how much, and to allow the buyer to ascertain the target’s risks, potential combination benefits, and overall strategic fit. To help a buyer answer these questions, information related to a target company is made available in a data room during the due diligence stage of a transaction. The findings of the team conducting the due diligence exercise help the acquirer measure the risk factors associated with the target’s business in making the investment and acquisition decision. Thus, the data room is an integral part of the due diligence process.

In either case, detailed auditing must be provided for legal reasons, so that a record is kept of who has seen which version of each document — when and for how long. As an essential part of the Mergers and Acquisitions process, the data room (dealroom or dataroom) is set up as part of the central repository of data relating to companies or divisions being acquired or sold. The data room enables interested parties to view material relating to the business in a controlled environment. Confidentiality is paramount and strict controls for viewing, copying and printing must be imposed. Conventionally this is achieved by establishing a supervised, physical data room in secure premises with controlled access. In most cases with physical data rooms, only one bidder team can enter the room at a time.

The traditional data room will literally be a physically secure, continually monitored room, normally in the vendor’s offices (or those of his lawyers), which the bidders and their advisers will visit in order to inspect and report on the various documents and other data made available. Often only one bidder at a time will be allowed to enter and if new documents, or new versions of documents are required, these will have to be brought in by courier as hard copy. Teams involved in large due diligence processes will typically have to be flown in from many regions or countries and remain available throughout the process. Such teams often comprise a number of experts in different fields and so the overall cost of keeping such groups on call near to the data room is often extremely high. Combating the significant cost of physical datarooms is the virtual dataroom, which provides for secure, online dissemination of confidential information. In a smaller business or one which is being bought/sold by a single person, one would need that an ‘off-site’ data room is created wherein the documents are made available for a limited time period. Here the number of documents being reviewed and the number of persons reviewing them would be limited.

But when the business is large, the number of documents being reviewed and the team dynamics are different; it gets worse when the acquisition is a global one. It can turn out to be a logistical nightmare. An alternative to the physical data room involves the setting up of a Virtual Data Room (VDR) in the form of an extranet (essentially an Internet site with limited controlled access, using a secure log-on supplied by the vendor/authority, which can be disabled at any time by the vendor/authority if a bidder withdraws) to which the bidders and their advisers are given access via the Internet. Much of the information released will be confidential and restrictions should be applied to the viewer’s ability to release this to third parties by forwarding, copying or printing. This can be effectively applied to protect the data using digital rights management.

VDRs reflect the trend towards digitalising almost anything that exists in physical form. A VDR is similar in many ways to its predecessor, the physical data room (PDR). Both allow the buyer to conduct an organised assessment of the target. Several differences between a VDR and PDR exist, such as their location (online versus physical location), document format (digital versus paper), data storage (central storage versus physical location), and form of access by several potential buyers (parallel versus sequential). Therefore, documents in a VDR are presented more efficiently and effectively in digital format. Moreover, access to a PDR is typically sequential, while access to a VDR is exclusively parallel. In a single PDR, only one buyer team may access the information and multiple physical data rooms must be set up at added effort and expense if a process is to be accelerated with several potential buyers participating. Through a VDR, multiple buyer teams may access the same data at the same time.

A Virtual Data Room has exactly the same strengths as a conventional Data Room — controlling access, viewing, copying and printing as well as setting time limits on viewing — and logging who saw what and when — but has none of the disadvantages of being at a standard location, needing couriers to move or update documents or needing transport of key staff back and forth. It is also accessible 24/7 over the allowed period. With a Virtual Data Room, documents reach regulators and investors in a more efficient and timely manner. Improvements in efficiency aside and speed aside, a Virtual Data Room typically pays for itself in a single M&A transaction.

In the next write, we will discuss the pros and cons of setting up a VDR and the modalities.